A Practical Guide to the Tax Cuts and Jobs Act

On Thursday, November 2nd the House of Representatives released a draft of their tax reform legislation entitled “The Tax Cuts and Jobs Act” as presented by the Ways and Means Chairman Kevin Brady (R-TX). This legislation represents the largest proposed transformation of the U.S. tax code in more than thirty years. While both changes are expected in the committee markup phase and the Senate will certainly bring its own priorities to the process, this release is the first bill text we’ve seen from a tax-writing committee. The goal of President Trump and the republicans in Congress are to have a final tax bill enacted ideally before the Thanksgiving break but certainly before the calendar year end of 2017. The subsequent synopsis will serve to highlight just some of the more significant provisions of this bill in its current form and its impact on both individuals and businesses.

The Tax Impact on Individuals and Families 

  • A reduction in the number of tax brackets to four:  12%, 25%, 35% and 39.6%;
  • A significant increase in the standard deduction;
  • The repeal of the deduction for personal exemptions;
  • The repeal of the Alternative Minimum Tax;
  • Enhanced family friendly tax credits including a new Family Tax Credit, which includes expanding the Child Tax Credit;
  • The elimination of the state and local income tax deduction;
  • Placing a $ 10,000 ceiling on the amount a taxpayer can claim as a property tax deduction;
  • Restricting the exclusion on the gain from the sale of a personal residence, but retaining the maximum exclusion amount of $500,000; and
  • No change in the pre-tax I.R.C. § 401(k) contributions limit (e.g., $18,500 for 2018).

The Tax Impact on Businesses

Corporate Provisions

  • The reduction of the corporate tax rate to a flat tax rate of 20% (i.e., 25% for a Personal Service Corporation) while proposing the elimination of many other tax incentives (i.e., both tax credits and tax deductions such as the Work Opportunity Tax Credit; the Domestic Production Activities Deduction; amongst other tax incentives);
  • The retention of the highly popular R&D Tax Credit;
  • The repeal of the Alternative Minimum Tax; and
  • Accelerated expensing for purchasing capital expenditures.

Pass-Through Entities

  • Transition to a 25% tax rate of a portion of business income passed through while a portion would be treated as ordinary wage income;
  • The Elimination of technical terminations of partnerships; and
  • The introduction of new rule to require partnerships to include in gross income select capital contributions.

The Tax Impact on Estate and Gift Tax Planning

  • The increase of the generation-skipping transfer tax exemption to $10,000,000 (i.e., $20,000,000 for married taxpayers) commencing in 2018;
  • The increase of the estate and gift tax unified tax credit exclusion to $10,000,000 (i.e., $20,000,000 for married taxpayers) commencing in 2018;
  • The repeal of the estate tax commencing in 2024;
  • The decrease of the gift tax rate to 35% commencing in 2024; and
  • The repeal of the generation-skipping transfer tax beginning in 2024.

While the road to tax reform accelerates in the coming weeks leading up to the calendar year-end, both the House of Representatives and the Senate must still compromise and present President Trump with a unified bill before any tax reform can be signed into law which may prove to be overly ambitious to be accomplished on or before December 31, 2017.

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